[private]Richard Buxton has been Head of UK Equities at Schroders for the past ten years and someone whose views on the UK stock market I have followed for nearly twice that time. His UK Alpha Plus Fund, a concentrated low turnover portfolio of some 30-35 large and midcap stocks, selected on the basis of in-house research, has risen in value by 163% since its launch in 2002 and ranks fourth of 191 funds in the All Companies sector over that period. This is his current take on where the markets sit.
How generally do you see the markets at the moment?
Short term, every tactical indicator suggests that we are due a setback, but a lot of people want equities to pull back in order to buy them, so medium term I suspect that they will grind higher.
Are brokers right to be so generally bullish about equities?
The consensus is worrying, but probably right. Double dip fears haven’t completely transferred into growth euphoria and valuations aren’t stretched. Corporate are only just starting to spend – and it’s this which will drive growth, profits and share prices higher.
What particular opportunities do you see? Are there any striking valuation anomalies?
Not really; my portfolio is fairly well spread. The exception remains UK consumer shares, where retailers and house builders are deemed “untouchables”. That is the area in which I have been buying for the last year.
Can you give some examples?
Balance sheet concerns are misplaced. There is no prospect of further writedowns barring a housing meltdown, on a scale I don’t expect. The company is successfully managing for margin not volume. The shares are too cheap and trade at a big discount to NAV.
A new management is addressing the Crispin Davis legacy, which has scarred investors such that no-one is interest in the stock any more. However a number of brokers have started to put out buy notes on the shares. The company is in a number of late cycle businesses which should improve soon.
Came back to the market with the wrong balance sheet, but that has now been sorted now. The management is good, and the shares are priced in anticipation of huge profit downgrades when the reality is that they are likely to surprise by being alright. Debenhams sits on a free cash flow yield of 13-14%.
What would you avoid and why?
No specific sectors in the equity market are woefully expensive. Some offer better opportunities than others. Bonds surely have to have reached of a 30 year bull market and will probably halve over the next 15 years, just as all our pension funds have been forced into them by the unholy trinity of the actuary, the accountant and the regulator.
What are your thoughts on gold and property?
Gold is the last store of value or the ultimate greater fool momentum trade? I suspect sheer weight of money wishing to have just a little bit will mean its bull market is intact, but it may have a rocky year to test the bulls. UK property looks dull; no clearing price was ever established at the lows and the banks will just offload slowly over years, so prices look pretty stuck to me.
Any view on currencies and interest rates?
Long run undervalued Asian currencies will appreciate. The dollar will remain the reserve currency throughout my lifetime, defying the perma-bears. My guess is that UK interest rates won’t rise this year, despite our rising inflation rate, as the Bank of England will refuse to take any risks with the recovery. That said, I am confident that the poor UK GDP number in Q4 2010 was a rogue number.
How does this market compare to others you have lived through?
Each recovery is different and everyone is familiar with the headwinds this time and the “new normal”, but the truth which dares not speak its name is that this recovery feels remarkably similar to previous ones.[/private]